Justifiable Doubts Regarding The Independence Of Empanelled Arbitrators Would Always Exist: Meghalaya High Court

The Single Bench of Chief Justice Sanjib Banerjee held that even if a person is named as an arbitrator in the arbitration agreement entered into before the occurrence of the dispute, and whose appointment would otherwise fall foul of the Seventh Schedule, a party is not barred from objecting to the agreed arbitrator taking up reference. The Court added that the proviso to Section 12(5) of the Arbitration and Conciliation Act, 1996 (A&C Act) specifically refers to a post- dispute waiver of the applicability of the Seventh Schedule and not a pre-dispute waiver.

A tender was awarded by the Ministry of Defence, Union of India to the petitioner/tenderer Jaguar Overseas Limited. The Arbitration Clause in the contract provided that a serving officer of the Military Engineering Services (MES) would be a sole arbitrator who would adjudicate the disputes between the parties. After some disputes arose under the Contract, the petitioner filed an application before the Meghalaya High Court for appointment of an arbitrator.

The Union of India conceded before the High Court that in view of the Arbitration and Conciliation Act, 1996 as it now stands after the Arbitration and Conciliation (Amendment) Act, 2015, a dispute between the parties cannot be referred to a Sole Arbitrator who is a serving officer of the MES.

However, the Union of India averred that the Ministry of Defence had prepared a panel of arbitrators who were not serving officers and who had no relationship with the Ministry of Defence. Thus, the Union of India submitted that any of the independent persons named in the said panel could be appointed as a Sole Arbitrator.

The Court observed that Section 12(5) of the A&C Act provides that notwithstanding any prior agreement to the contrary, any person whose relationship, with the parties or counsel or the subject-matter of the dispute, falls under any of the categories specified in the Seventh Schedule, shall be ineligible to be appointed as an arbitrator.

The proviso to Section 12 (5) provides that the parties may, subsequent to the disputes having arisen between them, waive the applicability of Section 12 (5) by an express agreement in writing.

The Court noted that any person who is an employee, consultant, advisor or who has any other past or present business relationship with a party, is also barred to be an Arbitrator under Section 12(5) read with the Seventh Schedule of the A&C Act.

The Court held that partiality or bias of an Arbitrator is a state of mind and that obvious bias or apparent partiality need not be demonstrated. The Court added that a reasonable possibility of bias or likelihood of partiality would suffice.

The Court ruled that a person who is empanelled as an arbitrator by an authority and who stands to obtain monetary benefits by taking up an arbitral reference, may be favourably inclined towards the said party. The Court added that the empanelled arbitrator may be hesitant to pass a punitive or heavy award against the party that empanelled him, fearing that his name may not figure in the panel in future.

The Court held that an empanelled arbitrator may subconsciously pass an award more heavily in favour of the party that has empanelled him so as to be retained on the panel.

The Court ruled that since there was a reasonable possibility that such a situation would arise, there was a justifiable doubt regarding the independence or impartiality of the empanelled person.

The Court held that in view of the proviso to Section 12 (5) of the A&C Act, that deals with a post-dispute waiver of the applicability of the Seventh Schedule, the other party to the arbitration agreement can accept one of the persons named in the panel.

The Court ruled that even if a person is named as an arbitrator in the arbitration agreement entered into before the occurrence of the dispute, and whose appointment would otherwise fall foul of the Seventh Schedule, a party is not barred from objecting to the agreed arbitrator taking up the reference. The Court held that this is because the relevant proviso to Section 12(5) specifically refers to a post- dispute waiver of the applicability of the Seventh Schedule. The Court added that such a waiver has to be a conscious relinquishment of a known right, and that it must be an overt act of relinquishment and not a passive act in the form of an acquiescence.

Thus, the Court held that once the petitioner/ contractor does not accept the names of the possible arbitrators that are listed on the panel prepared by the Ministry of Defence, the panel cannot be enforced since there would always be justifiable doubts regarding the independence or impartiality of the empanelled arbitrators.

The Court thus appointed a former Judge of the Gauhati High Court as a Sole Arbitrator and referred the parties to arbitration.

Case Title: Jaguar Overseas Limited versus Union of India & Anr.

Citation: 2022 LiveLaw (Meg) 20

Dated: 18.04.2022 (Meghalaya High Court)

Counsel for the Petitioner: Mr. P Chauhan, Adv. with Ms. P. Biswakarma, Adv

Counsel for the Respondent: Dr. N. Mozika, ASG with Ms. S. Rumthao, Adv

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